A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington, D. C., on Tuesday, June 13, 1950, at 2:15 p.m.

PRESENT: Mr. McCabe, Chairman Mr. Sproul, Vice Chairman Mr. Davis Mr. Draper Mr. Eccles Mr. Erickson Mr. Peyton Mr. Szymczak Mr. C. S. Young

Mr. Morrill, Secretary Mr. Carpenter, Assistant Secretary Mr. Thomas, Economist Messrs. Peterson, Stead, and John H.

Williams, Associate Economists Mr. Rouse, Manager, System Open Market

Account Mr. Thurston, Assistant to the Board

of Governors Mr. Riefler, Assistant to the Chairman,

Board of Governors Mr. Sherman, Assistant Secretary Mr. Ralph Young, Director, Division of

Research and Statistics, Board of Governors

Mr. Youngdahl, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors

Mr. Arthur Willis, Special Assistant, Securities Department, Federal Reserve Bank of New York

Messrs. Williams, Gidney, Gilbert, and Leedy, alternate members of the Federal Open Market Committee

Messrs. Leach, McLarin, and Earhart, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

Mr. Wurts, Assistant Vice President, Federal Reserve Bank of New York

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Upon motion duly made and seconded and by unanimous vote, the minutes of the meetings of the Federal Open Market Committee held on February 28 and March 1, 1950, were approved.

Upon motion duly made and seconded and by unanimous vote, the actions of the executive committee of the Federal Open Market Committee as set forth in the minutes of the meetings of the executive committee held on March 1, April 12, and May 3, 1950, were approved, ratified, and confirmed.

Before this meeting there had been sent to each member of the

Committee a copy of a report of open market operations prepared at

the Federal Reserve Bank of New York covering the period from March 1,

1950, to June 7, 1950, inclusive. Mr. Rouse commented briefly on this

report and also on a supplemental report covering commitments executed

for the System account during the period June 8 to June 12, 1950,

inclusive. Copies of both reports have been placed in the files of

the Federal Open Market Committee.

Upon motion duly made and seconded and by unanimous vote, the transactions in the System account for the period February 28, 1950, to June 12, 1950, inclusive, were approved, ratified, and confirmed.

Chairman McCabe reported briefly on developments since the

last meeting of the Committee referring particularly to the letter

sent to the Secretary of the Treasury, pursuant to action of the

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executive committee of the Federal Open Market Committee, under date

of May 25, 1950, a copy of which had been sent to each member of the

Committee. He stated that up to the present time no reply to that

letter and no comment with respect to the recommendations contained

in it had been received from the Treasury Department.

There followed a discussion of the relationship of Treasury

financing to System credit policy during which Mr. Sproul made a

statement substantially as follows:

System credit policy is restricted to a modest policy so far as money rates are concerned. The older method of substantial changes in rates is not practicable or necessary in this situation. Since our policy must be a modest one, it should be a timely and flexible one. We have tried to base policy in the past on the whole situation and not on one or a few indicators. There has been no change in our policy since we changed last fall from a policy of ease to one of neutrality. Meantime there has been a substantial change in the economic situation, in business sentiment, in private capital expenditures, in inventory accumulation, and in prices. On the other hand, bank credit has declined about seasonally during the spring, and the Federal Reserve Banks and commercial banks have moved about $3 billion of Government securities into nonbank hands. There is the question which was discussed during the spring of whether, in order to maintain the economy at a sufficiently high level of production to absorb the increasing labor force, we have to keep some element of stimulation in it.

If we were convinced that we are experiencing a balanced expansion in durable and nondurable goods we would need to do nothing about it. But I do not think we are having a balanced expansion. It is based too much on a high level of activity in housing and automobiles, aided by too easy terms for mortgage financing and consumer credit. In these circumstances, the contribution of a

modest credit policy should be to try to restrain a too rapid increase until the whole economy is in better

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balance. That calls for a firming of short-term rates by 1/8 per cent as soon as the Treasury's July 1 financing is out of the way. There should be some further decline in prices of long-term Governments and if we come to a situation when we are faced with the decision whether to let long-term bonds go below par, I would let them go below par. The situation is very different from the one existing the last time we faced this question.

The Treasury needs for new money have been reduced to about $1.8 billion for the fiscal year with only a small amount needed in the third quarter of this calendar year. In this situation there should be no embarrassment to the Treasury in such firming of interest rates as we are talking about. Such a policy would contemplate breaking a 1-1/4 per cent one-year rate early in July. It would be an indication of policy to the money market and would facilitate some downward movement of prices in the long-term market. It should be followed quickly by some increase in discount rates which would be a signal to the whole financial community and to the public that there has been a change in our policy in the light of the changed business and credit situation. We should continue to press for the Treasury getting additional money so far as possible from nonbank investors. In the circumstances, it makes no difference whether the money comes from a marketable or a nonmarketable bond but we should emphasize the desirability of it coming from nonbank sources.

In the ensuing discussion Mr. C. S. Young raised the question

whether an increase in margin requirements would be desirable in

view of recent rises in prices of stocks and stock market activity.

Chairman McCabe stated that the Board had considered this

matter at a meeting this morning and that it had come to the con

clusion that no change in margin requirements was desirable at this

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time. At his request there were distributed copies of a confidential

memorandum prepared in the Division of Research and Statistics of the

Board of Governors under date of June 8, 1950, with respect to the

question of margin requirement policy.

There then followed a visual presentation of the economic

situation by members of the staff of the Board's Division of Research

and Statistics.

Following the visual presentation, Mr. Thomas made a statement

regarding what the analysis signified in terms of Federal Reserve

policy. He stated that recent developments appeared to have many of

the aspects of a boom, that a substantial volume of business capital

expenditures had been taking place and some contraction might now be

expected, that increased consumer buying of consumer durable goods and

housing was proceeding at a rate which probably would not be sustained,

and that rises in prices of an unexpected and most alarming character

had taken place during the last four months. Credit expansion, he

said, had taken place in real estate, consumer credit, and the stock

market at a rate more rapid than at any other time in the postwar period,

and if business credit should increase even at a seasonal pace the

overall expansion would be almost unprecedented. Mr. Thomas also

said that, reflecting the policy of selling Government bonds from the

System account, bank credit in U. S. Government securities had con

tracted thus far this year, that that had had a stabilizing influence,

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but that if the trend should be reversed accompanying a continuation

of the expansion of credit in other fields there would be cause for

alarm. He added that the rise in prices of real estate and commodities

of the type now occurring and under conditions now existing was a

clear indication of an unhealthy situation, and the expansion in

credit had been sufficiently broad to justify the use of general

quantitative powers of credit restraint without emphasis on selective

credit controls.

After discussing existing limitations on Federal Reserve

actions, Mr. Thomas suggested policies which might be considered by

the Committee. These included the purchase of short-term securities

more reluctantly with consequent rises in short-term rates after

July 1, an increase in the discount rate of the Federal Reserve

Banks, a recommendation to the Treasury that new money to finance

the Government deficit be obtained through the issuance of a non

marketable bond, and that securities maturing in September be

refunded with an intermediate-term bond. He added that sales of

long-term bonds for the System account probably should be discontinued

in the event the Treasury issued a nonmarketable long-term bond and

that in the event of a decline in bond prices the policy of the

System should be to maintain orderly markets but avoid rigid support

of prices.

There followed a discussion of the economic situation during

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which Mr. John H. Williams stated that he felt the present offered

an almost unparalleled opportunity for the System to do something to

follow up the statement issued by the Federal Open Market Committee on

June 28, 1949, as there might never be a time when we could act with

less embarrassment to the Treasury. For reasons which he outlined,

he felt that nothing would be as well understood by the public or

carry as much conviction as an increase in the discount rate.

Mr. Stead suggested the possibility that the estimates of

employment were on the optimistic side and that in the next few months

we might experience some increase in unemployment. While this might

not be serious in relation to total employment, it might result in

pressures for steps to counteract that trend. A related subject, he

said, was the indication of lower agricultural production resulting

from insect infestation which would reduce farm income, and a third

weakness was the rate of increase in consumer and mortgage credit

which indicated that we are sustaining a high level of consumer

expenditures and incomes by a rapid increase in consumer credit.

These points made him more inclined to question whether the present

upsurge could be sustained.

Mr. Peterson questioned whether there was sufficient optimism

in the whole economy to sustain an accelerating boom for any length

of time. He suggested that there was a feeling of caution among small

businessmen which would dampen the current inflationary boom.

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Mr. Evans joined the meeting during the foregoing statements,

having just arrived in Washington from the West.

During consideration of the suggestions that had been made

earlier in the meeting concerning credit policies that might be adopted,

Mr. Sproul stated that in the light of all of the factors in the

situation it seemed to him that as soon as the Treasury's July 1

refunding was out of the way the System should follow a policy of

bringing about a rise in short-term rates looking to an issuing rate

of 1 3/8 per cent on one-year Treasury certificates in September.

He felt that the increase in short-term rates would be a signal to

the financial community of a change from the policy of neutrality

adopted in the fall of 1949, that to make clear to the public the change

in policy there should also be a prompt increase in the discount rate

of the Federal Reserve Banks probably about mid-July, and that these

actions should be accompanied by continuing to supply long-term bonds

from the open market account although, as suggested by Mr. Thomas,

the release of securities might be modified in the event the Treasury

issued a long-term bond. With respect to prices of long-term Treasury

bonds, Mr. Sproul did not think the Committee was now faced with the

problem of whether such securities should be allowed to fall below

par but that he now felt that if that question should arise during

the next few weeks they should not be supported at par.

Mr. Eccles stated that he felt the first thing to do was to

make every effort to induce the Treasury to finance the deficit and

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if possible to refund some of the maturing securities with funds

obtained from nonbank investors, and that to that end the Committee should

recommend to the Treasury that it issue as soon as possible a nonmarketable

15-year 2-1/2 per cent bond on a tap basis. As a part of the program,

he felt that the Committee should do what it could to increase the short

term rate so that the September and October refunding of the Treasury

would be done on the basis of a 1 3/8 per cent one-year certificate

rate. He recognized that to be most effective an increase in short

term rates should be accompanied by a rise in the discount rate. How

ever, he questioned whether the Federal Reserve Banks should increase

the rate as soon as suggested by Mr. Sproul. Such action, he said,

would increase the spread between the discount rate and the short-term

rate on Government securities which would discourage the use by member

banks of the discount facilities of the Reserve Banks to adjust their

reserve position from week to week. While he did not anticipate that

long-term bonds would decline to par in the near future, he suggested

that if prices declined to around 100-1/2 the Committee review its

policy before testing the market closer to par.

Mr. Evans said that he did not think at the moment that the

Committee was faced with the problem of allowing long-term securities

to decline below par and that should that question arise there should

be another meeting of the Committee.

Comments of the other members of the Committee and of the

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Presidents of the other Federal Reserve Banks indicated general

agreement with the suggestion for an increase in short-term rates and

continuance for the time being of the present policy of making long

term bonds available from the System account.

The meeting then recessed and reconvened on Wednesday, June

14, 1950, at 10:10 a.m. with the same attendance as at the close of

the session on June 13 except that Mr. Thomas was not present.

Chairman McCabe referred to the instructions to be issued to

the executive committee with respect to sales of long-term bonds from

the System account and to the understanding at the meeting on March

1, 1950, that, operating under the general direction issued by the

Federal Open Market Committee to the executive committee, and within

the limits imposed by the terms of Treasury financing and by the

necessity of avoiding a loss of confidence in the long-term Government

securities market, the executive committee would continue to sell long

term securities from the System account unless and until there was a

change in the business situation which made it undesirable to pursue

that policy. He suggested that, in the light of the discussion at the

session yesterday afternoon, the executive committee be authorized to

continue to carry out that understanding until the price of the longest

restricted Treasury bond reached 100-1/2, at which time sales would be

discontinued and, if the market continued weak, the executive committee

would be authorized to purchase such securities at declining prices as

might be necessary to preserve orderly market conditions.

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There was a further discussion of the timing of an increase

in the discount rate at the Federal Reserve Banks and, while it was the

consensus that the increase should not be made effective until the

short-term market rate increased somewhat, there was no decision on the

question what level in the short-term rate would call for discount

rate action. Mr. Sproul thought the action could be taken about the

middle of July.

Turning to the question of current Treasury financing needs,

Chairman McCabe suggested that he and Mr. Sproul be authorized to

supplement the suggestion contained in the letter to the Secretary of

the Treasury dated May 25, 1950 by urging that the Treasury issue

promptly a nonmarketable bond of the series A type, and that the

question whether there should be a further written communication to

the Treasury be left for determination by himself and Mr. Sproul

following the meeting with the Secretary.

The foregoing suggestion was approved by unanimous vote.

In considering the general direction to be issued to the

executive committee, it was suggested that there be added to the

second paragraph a sentence which would provide that the authority

to arrange for purchases of securities directly from the Treasury

would terminate on June 30, 1950, unless the authority of the Federal

Reserve Banks to effect such transactions was extended by the Congress.

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With respect to the limitations contained in the direction, Mr.

Rouse stated that the present limitations appeared to be satisfactory.

Thereupon, upon motion duly made and seconded, the following direction to the executive committee was approved unanimously with the understanding that the limitations contained in the direction would include commitments for the System open market account:

The executive committee is directed, until otherwise directed by the Federal Open Market Committee, to arrange for such transactions for the System open market account, either in the open market or directly with the Treasury (including purchases, sales, exchanges, replacement of maturing securities, and letting maturities run off without replacement), as may be necessary, in the light of changing economic conditions and the general credit situation of the country, for the practical administration of the account, for the maintenance of orderly conditions in the Government security market, and for the purpose of relating the supply of funds in the market to the needs of commerce and business; provided that the aggregate amount of securities held in the account at the close of this date other than special short-term certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury shall not be increased or decreased by more than $2,000,000,000.

The executive committee is further directed, until otherwise directed by the Federal Open Market Committee, to arrange for the purchase for the System open market account direct from the Treasury of such amounts of special short-term certificates of indebtedness as may

be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held in the account at any one time shall not exceed $1,000,000,000. The direction

in this paragraph will terminate on June 30, 1950, unless the authority of the Federal Reserve Banks to purchase securities directly from the Treasury is extended by the Congress.

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The policy to be followed in the replacement of System

maturing bill holdings was then discussed and it was agreed unanimously

that no change should be made in the existing understanding that the

executive committee would be guided by what would be required in the

light of current conditions in the money market to carry out the

general credit policy of the Federal Open Market Committee.

In connection with the ranges within which bills and certificates

would be purchased by the Federal Reserve Bank of New York for the

System account, it was suggested that the Federal Open Market Committee

continue the existing authority to the executive committee to determine

from time to time the ranges within which such purchases would be

made, with the understanding, however, that after July 1, 1950, the

upper limit of such ranges would be increased from 1.24 to 1.36 per

cent, and that the authority would continue to be exercised within the

framework of the general credit policy of the Federal Open Market

Committee.

Upon motion duly made and seconded and by unanimous vote, this suggestion was approved.

A draft of a statement of policy to guide the executive committee in

relation to transactions in long-term bonds, designed to conform to the views expressed in the discussions of the Committee earlier in this meeting, was presented, and after discussion was approved unanimously in the following form:

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Operating under the general direction issued by the Federal Open Market Committee to the executive committee, the executive committee is authorized to continue to sell long-term securities from the System account unless and until there is a change in the business and credit situation, or the Treasury issues new securities to finance the deficit, which would make it undesirable to pursue the policy further. Should the price on the longest restricted issue decline to between 100-1/2 to 100-3/4 the executive committee would direct only such operations as were necessary to maintain orderly market conditions pending a meeting of the Federal Open Market Committee which would be called promptly to consider, in the light of the statement approved at the meeting on June 28, 1949, how far any further decline that would be brought about by market conditions would be permitted to go.

It was understood that the next meeting of the Presidents'

Conference would be held in Boston on September 21 and 22 and that the

next meeting of the Federal Open Market Committee and the joint

meeting of the Presidents and the Board would be held in Washington

on September 27 and 28, 1950, unless developments made it necessary

to call a meeting of the Federal Open Market Committee before that

time.

Thereupon the meeting adjourned.

Secretary.

Chairman.